This is the first essay on Bitcoin in which I explore the relationship between Bitcoin and Gold. I will soon write another essay exploring potential of Bitcoin as a means of payment. I am not predicting any future prices.
I believe most of the people are aware of what money means philosophically. For me, money is a construct of our collective imagination. A way to store the value one has provided to the world or sometimes inherited. We value the printed notes it only because everyone else values it which includes the government that is the ultimate authority on that matter. If everyone including government stopped accepting it as a means of payment or a store of value, then the paper notes would be worthless. Money has value because we value it in our ‘collective imagination’.
Bitcoin. I have thought long about this topic. Far longer than I should have. But I hoped to share my skeptical enquiry and thought process on this topic. I don’t present an investment thesis. I only explore Bitcoin’s potential as a store of value like Gold. In this essay, I will try to compare Gold and Bitcoin.
Many of you might not agree with me as is always the case.
Store of value — The new gold?
Many people liken Bitcoin to gold or should I say ‘digital gold’.
The total gold present in the world can be fit into a cube of around 22m or by weight, is close to 200,000 tons. Gold is the third most expensive metal on the planet after Rhodium and Platinum. Rhodium is much rarer and more useless than Gold is.
No one alive has probably much use for Gold. It is a shiny, beautiful, scarce but not so useful rock. Yet it has held its value for more than 10000 years and is priced so high that most people aren’t able to buy even a kilogram of it after years of toiling at corporate jobs. When one thinks about it, Gold is pretty much useless for almost everyone. To its credit, Gold is a good conductor of electricity and is malleable, ductile and non-corrosive. Yet for every job it does, there are metals that do it better and cost a fraction of a fraction of price of gold. And there isn’t enough gold in the world to do the above-mentioned jobs for even a single big city on this planet.
Then, where does gold get its humungous value from? The answer is scarcity. Gold isn’t an abundant metal. It is finite. And it is completely unique. And It can’t be produced more. Just like the value of a historical painting by the likes of DaVinci or some ancient historical relic from centuries ago derives its huge value at auction tables from being non-reproducible and scarce, Gold derives its value because there isn’t much of it in the world and people demand it. If everyone had the ability to produce gold, it would become worthless.
I don’t see gold in a positive light. It not useful to majority of humans, if any. But my sentiments don’t agree with the price it commands and I agree that Gold will never see its value fall by much at least for some centuries. Ideally, humans should put a high value on things which are of extreme value to individuals. Like land, companies, food, technology, etc. But gold provides no value to anyone except in the case of status signaling in rare occasions. Gold for me is a ‘bubble which will never burst’ . It will probably increase in price over a long period of time despite its limitations. Humans do value things which are scarce at a premium.
While thinking about gold I was struck with a question. “Is there anything in the whole world that is extremely scarce, non-reproducible, completely unique, somewhat useless but extremely valuable?” And I couldn’t find such a thing. Maybe there is but as of now I could not find it. Please do tell me if there is. Non-reproducible scarce products are often valued highly according to my current knowledge.
Like Gold, Bitcoin and other cryptocurrencies are finite in nature. Unlike, fiat currency it can’t be printed more. This finiteness leads to comparisons between Bitcoin and gold.
Some of my observations regarding this are:
- Gold has been a status of wealth for at least a couple of millenniums now. Humans seek status and it is usually what drives them. And it has survived as a status symbol for some millenniums. Bitcoin does not have a physical presence and one cannot show it in public as one shows their houses, luxury cars, yachts or gold. And it would be hard for it to become a status symbol without any physical presence.
- Also, Gold started as a medium of exchange. It transitioned to become a status of wealth and then became a store of value. Bitcoin is trying to do that in a different order. I am not sure how it will work out. Bitcoin must be useful as a payment system first to become a store of value.
- There is only one Gold completing in the market of Gold. There are no other ‘Golds’. But when you refer to Bitcoin as ‘Digital Gold’, there are certain errors people make. Bitcoin is a ‘shared imagination’ like brands, companies, rules of a sport, etc. Gold or other metals are ‘real’. Let me explain this thing to you before you zone out and declare me an idiot. There are only a certain amount of ‘Au’ atoms i.e. Gold on this planet. We cannot create exactly similar ‘Au’ atoms (at least as of now). But we can create infinite exactly similar cryptocurrencies like Bitcoin with exactly the same code and protocol. And many of them exist as of now like Ethereum , Monero, etc (They all are not exactly similar but are similar enough like Coke and Pepsi). The idea is that the main ingredients are almost same, but the branding is different in our collective imagination. Gold is scarce in the real sense of the word. For something scarce to be a store of value, it has to be non-reproducible and absolutely unique. Bitcoin does not have something unique other cryptos don’t have. If Bitcoin is ‘Digital Gold’, then there are many other ‘Digital Gold’s’ competing in the market and infinite more can be created at will. Bitcoin has the biggest advantage among them due to ‘Network effects’ as it was the first mover in this industry and has got huge publicity and attention. But don’t confuse the value given to Bitcoin by ‘Network effects’ than what is given to Gold by scarcity and status. Plus, Gold has held its value for millenniums despite thousands of challenges to the extent it has become a part of our culture.
Just because it is finite like Gold doesn’t make it like Gold. One has a physical presence rooted in deep human desire for status and completely unique while other is an easily replicable means of payment system written in clever computer code.
The problem with the argument that bitcoin is similar to gold is it has some merit. But only some. And it confuses most people thinking it to be digital gold, which I don’t agree with.
